Tesla's Largest Competitive Advantage

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About: Tesla, Inc. (TSLA)
by: Infinity Research
Summary

Tesla recently acquired Maxwell Technologies, an ultracapacitor and battery component manufacturer that's working to provide improved energy storage capabilities.

Tesla’s battery research team recently applied for a battery patent that will lead to reduced charging times, higher energy density, and a lower cost.

The $35,000 Model 3 will likely be made available as a result of these new advancements.

Batteries are one of the most important components of an electric vehicle (EV) and are where Tesla’s (TSLA) technological advantage shines the greatest. Tesla recently obtained patents for a battery that's not only more energy efficient but can be produced at a lower cost. They’re one of the few components of Tesla vehicles made with patents that are not available for other companies to use. Batteries are an important factor in defining operating margins and are often the driving factor behind the overall price of an electric vehicle. As Tesla continues to drive advancements in battery technology, they achieve stronger margins and eventually accomplish their goal of mass producing $35,000 Model 3s. Although it seems that their main focus is currently their automotive products, they also are working on ramping production of their energy production and storage devices which will benefit from better battery technology as well. These energy storage devices will see much larger profit margins as a result of the potential new battery technology.

Maxwell Technologies

Tesla announced that they are acquiring Maxwell Technologies (NASDAQ: MXWL) at $4.75 a share for a total of $218 million, a premium of 55% above the share price prior to the announcement. Maxwell Technologies manufactures battery components as well as ultracapacitors, making it apparent that this was an investment in their unique energy storage technology. Ultracapacitors are able to store large amounts of energy without losing much, or any, of it over time due to heat or other conditions. Ultracapacitors store energy in an electric field as opposed to a chemical reaction, as batteries do, which allows them to discharge large currents much faster than a battery can. However, batteries are still much cheaper than ultracapacitors, and smaller, so a partner system will likely be implemented between the two storage units. Ultracapacitors also are capable of dramatically lowering the charge time of electronics, further playing into Tesla’s car manufacturing. Maxwell Technologies’ largest customers for their ultracapacitors are electric bus companies in China. They allow the buses to have quicker acceleration with the almost instantaneous release of energy and to charge faster allowing for less downtime. With the use of ultracapacitors, the already fast acceleration of a Tesla could become even faster. One of the largest criticisms for EVs is their slow charging rate, but with ultracapacitors, this issue may become significantly less prominent. Ultracapacitors aren’t the only thing that Maxwell Technologies is pioneering, they also are developing dry battery electrodes.

Currently, all batteries use a wet electrode, as it's much simpler and no one has been able to produce a successful dry electrode battery. However, many may claim to have reached a breakthrough, and this should always be met with skepticism. But Maxwell Technologies appears to be different. They detailed many breakthroughs with their battery density, lifespan, and cost. Battery density is important as it allows a battery to store more energy with less weight so an EV with a high battery density would weigh substantially less than one with a low battery density. This is one of the larger concerns with the Tesla Semi, which doesn’t have an official weight yet, because if the truck itself is too heavy it may not be allowed to carry heavy loads. With a higher battery density, this weight problem will be reduced and it will be able to better compete with its gas counterparts weight. According to Maxwell Technologies, their dry electrodes should be able to reduce the cost of battery production by 10-20% vs state-of-the-art wet electrodes and double their battery life. This means that Maxwell Technologies is on their way to creating sustainable dry electrode batteries. Maxwell Technologies has predicted that their dry electrode batteries will generate billions of dollars for the company by 2023. Tesla can now use both the ultracapacitors and dry battery electrodes in their vehicles and energy storage products, further improving quality and their margins.

Jeff Dahn Research Team

Jeff Dahn is the leader of Tesla’s battery development team which recently applied for a patent that will allow for cheaper, faster, and longer-lasting batteries. Dahn describes in the patent that they were able to use just two additives while most lithium-ion batteries require a minimum of five. This is great news for Tesla, however, it seems to be directly clashing with the acquisition of Maxwell Technologies. This is not the case. Jeff Dahn created this new battery using lithium nickel manganese cobalt compounds (NMC) as the electrolyte solvent, a solvent very common in EV batteries but not in Teslas currently. Maxwell Technologies created their dry electrode battery components with the ability to be used with a variety of electrolyte solvents including NMCs. This will allow for even greater cost reductions than the Maxwell batteries would provide alone, as well as allowing for a better density and lifespan.

Competitive Advantage

First, let's talk cars. EVs are able to achieve faster acceleration times than internal combustion engines due to the much faster release of energy from batteries as opposed to a combustion engine. With ultracapacitors, this release will be even faster, potentially leading to even faster acceleration times than any other EV can achieve. With the Tesla Semi, this will be especially advantageous as it allows the vehicle to greatly improve its acceleration which is slowed by its sheer size and weight. In addition, ultracapacitors aren’t affected by heat as batteries are. Therefore, doing rapid accelerations won’t wear down the battery and the car should have dramatically improved quarter mile times since the cars currently need to slow down a bit to avoid battery overheating. These even flashier numbers are likely to draw in more new customers who can’t resist the outstanding performance features.

In addition, charging could be another revolutionized aspect of Tesla with ultracapacitors. Teslas take about half an hour currently to charge 80%. That can be a long time to wait if you’re trying to get somewhere fast. With the new battery technology coupled with the ultracapacitors, Tesla vehicles are able to withstand the larger influxes of electricity and therefore charge must faster. The cars could be fully charged in a matter of minutes as a result of the new technology. This would be a huge advantage over Tesla’s competitors that have similar charging rates and even the new Porsche Tycan which boasts an 80% charge in just 15 minutes. Many people are turned away from EVs for this very reason, and by completely eliminating this, Tesla could potentially open the door to a much wider range of customers.

Tesla’s energy storage business is growing quite quickly and this addition to their storage units could be a catalyst in its growth. Tesla has built large batteries in Australia, New Zealand, and Puerto Rico that are connected to the power grid to provide emergency backup and sometimes serve as the sole energy provider for the entire grid. Puerto Rico, for example, has rebuilt its power grid almost entirely with Tesla Powerpacks. However, with ultracapacitors, the Powerpacks would lose almost no electricity due to the extreme heat in Puerto Rico. In Australia and New Zealand, the Powerpacks are being used as more of a backup than the main source. One of Tesla’s projects in Australia reportedly saved an electric company $800 million, although Tesla claimed it was more. This was due to the ability of the batteries to rapidly discharge energy when needed and store excess energy when it isn’t needed. Again, with the ultracapacitors and new battery technology, Tesla will further improve its storage capabilities and discharge time. With homes of those using solar power, it's also important that they have a reliable battery for the night, and an improved Powerwall could do just that. With the coupling of ultracapacitors and improved battery technology, Tesla is able to provide the cheapest and best power storage units, thus increasing the likelihood that large companies, such as Pacific Gas & Electric (PCG), will choose Tesla to provide large battery solutions.

Thesis Risks

The risk of this thesis is whether or not the new battery technology can truly be developed in a unique way. The ultracapacitors already have been in use, mostly in China as I mentioned earlier, so their reliability and results have been proven. Unfortunately, both the dry electrode batteries and the new batteries developed by Jeff Dahn and his team have not been tried and tested in EVs yet. However, Maxwell Technologies is quite confident that their new dry electrode batteries will be able to function as intended once they’re fully completed. They recently noted that they were able to store 300 watts of electricity per kilogram and believe that they are on a clear path to 500 watts per kilogram. Tesla’s 2017 Model S batteries had a density of 207 watts per kilogram, an industry best. In terms of durability, Maxwell Technologies has stated that the dry electrode batteries will be able to double the lifespan of traditional wet electrode batteries after conducting durability tests. The company seems quite confident in its battery technology and already has experience making batteries for EVs, so it seems that the dry electrode batteries will be able to function as expected. As for Jeff Dahn and his team, they have spent almost two years finalizing the patent and proving its merit. Throughout this process, they had to prove that the battery did indeed work as they said it would. The basic form of the battery, NMC, is one used by many EVs currently.

Financial Impact

These recent developments will obviously impact Tesla’s financials as they directly involve the company’s capital expenditures per vehicle or energy storage unit produced. As companies all strive to reach the $100 per kilowatt-hour (p/kWh), none have officially reached it yet. Tesla was expected to reach the milestone at the end of 2018 but did not end up officially reaching it. Audi claims that they have gotten the cost of their batteries down to just $114 p/kWh, a very impressive feat as others such as Chevy’s last official statement marked the cost p/kWh at $145. Audi is likely the closest EV manufacturer, behind Tesla, at achieving the coveted $100 p/kWh. However, since Tesla was close to the $100 p/kWh before the new battery upgrades, they will likely storm away once they are all approved and working. With the lowest lost p/kWh of any other company, Tesla can generate very strong margins with their EVs and likely get back on track in the production of the $35,000 variant of their Model 3 sedan. This would be huge for the company as this particular variant is likely to be the strongest center of demand for Tesla. Upon producing this vehicle, Tesla will finally have lived up to their promise of a truly affordable EV and be able to hit the mass market. This price reduction also will be right on time for the beginning of production of the lower end Model 3s in China by the end of this year. With this lower cost model, Tesla can compete in China’s very competitive EV market much more effectively as many Chinese EVs are at or cheaper than $35,000.

Overall, this new acquisition and work in battery technology development by Jeff Dahn and his team are very positive catalysts for Tesla. Both developments should allow for the continued development of their products as well as greatly reduced capex on all units sold. Their diminished capex will contribute to much higher profit margins allowing for more consistent profitability for Tesla in the future. This new strength will allow for Tesla to expand more without needing to take on too much debt as they currently do. With these breakthroughs, Tesla has become a much stronger company and its future is looking increasingly bright. Priced at almost $313 per share at the time this article was written, I believe Tesla can achieve a price of $415 by the end of the year through more steady profits and increased production capacity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.